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Retirement calculations: Determining how much you'll spend in retirement

Updated on July 6, 2011
Retirement calculations can help you anticipate retirement expenses.
Retirement calculations can help you anticipate retirement expenses. | Source

Most persons (if not all) cannot see into the future, but everyone can use the present as an indicator of it. Some persons say that retirement planning is not that important because they won’t be doing much in retirement. However, just living yields certain expenses, and these must be covered anyway. Soon, that “tomorrow” will be “today” and the reality of the challenges of retirement must be faced.

Estimating how much you may spend in retirement is vital in estimating how long your life savings will last. This information facilitates planning and would leave individuals in a better position to cover future expenses adequately. The following factors are necessary in calculating your retirement needs:

a) Retirement income

b) Retirement expenses

c) The projected annual withdrawal from your retirement fund

d) Inflation rate

Gauge current expenses and project future expenses

The first step in this process is gauging your current expenses realistically. This can be done by taking your current monthly or annual budget, analyzing it and determining what percentage of your pre-retirement income you'll need to survive comfortably in your golden years.

Your pre-retirement income and expenses would be projected using the inflation rate, the number of years left until retirement and current income/expenditure levels. It is also critical to discount or add costs that may not or may exist at the time of retirement. Financial advisors suggest leaving a buffer for medical/health expenses that may arise after you retire.

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The concept of prudence in determining retirement expenses

Prudence in financial management suggests that it is better to over-estimate than underestimate liabilities and expenses. After all, additional savings may act as a buffer in the event of contingent events and circumstances.

Prudence also applies to anticipating increases in expenses during retirement due to increases in the cost of living. This can be done by conducting a post-retirement analysis based on initial projections of your income and expenses. However, the pre-retirement estimate should be used as the base spending amount. You can then determine retirement spending in two primary ways:

i) As a defined fraction of pre-retirement income

ii) Inflation-adjusted

It is usually more prudent to index retirement spending to retirement income. Restricting your spending levels by establishing spending limits are also sound strategies. The spending limit may be your annual rate of withdrawal from your accumulated retirement fund. This can be used alongside percentage of income to be spent, which would help you to determine what your nominal and real spending would be in retirement.

Inflation, withdrawal rates and retirement income are critical in estimating how much you may possibly spend during retirement. How much you will spend should also be influenced by your financial means and your chosen lifestyle. Naturally, your chosen lifestyle should be based on your means, but some persons push the envelope too far.

While determining your retirement spending is inherently speculative, it leaves you better prepared to face the plethora retirement challenges. In addition, you can assess the effect of financial retirement risks on your spending and lifestyle during your golden years.


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  • SpiffyD profile image

    SpiffyD 6 years ago from The Caribbean

    Thanks for all the comments. With retirement planning, there are many roads to many destinations and many vehicles you can use. That makes it difficult to choose confidently. Too many options tend to overwhelm us.

    @frugalfamily. Yes, determining spending levels is just part of the overall retirement planning process. I don't subscribe to a particular formula though. I prefer if persons use a post retirement calculation in order to determine how long their money would last, given a few variables. That particular calculation would set a benchmark for your given financial circumstances and your anticipated expenses.

    About the claim that one should only draw interest from the retirement fund: That is how the standard retirement calculation is done. It uses the concept of money working for you. Therefore, if you need $50,000 per year in retirement and expect to live for 20 years in retirement, it's not as easy as multiplying the 20 years by $50,000 ($1,000,000). Instead,it is better to work out the amount of the fund that would yield $50,000 at a given rate of return.

    If you expect an 8% rate of return, then you would need $625,000. However, this is contingent on realistically determining the average rate of return, so it's better to be conservative about that estimate.

    The 4% rule-of-thumb is merely a rough guide that people could use. Some persons use significant portions of their retirement fund to pay off mortgages and other obligations/needs upfront and then settle into a lower, sustainable rate of withdrawal. That's why it's more useful to do the post-retirement calculation instead of using a rule-of-thumb.

  • frugalfamily profile image

    Brenda Trott, M.Ed 6 years ago from Houston, TX

    Just the tip of the iceberg! You made a very complex system digestable. Do you subscribe to a particular formula like many? Some say try to draw only interet of your retirement pool, others say upto 4%.

  • Bud Gallant profile image

    Bud Gallant 6 years ago from Hamilton, Ontario, Canada

    Very useful hub. I think far too often people avoid planning ahead until it's too late. Being aware of your expenses and preparing for the future is a vital component to achieving security.

  • Brett.Tesol profile image

    Brett Caulton 6 years ago from Thailand

    Voted up and useful.

    Planning for the future is so important. But, it is also harder than ever to work out a good plan, as so many retirement plans have failed on their promises. It really takes a lot of research and diversifying to be secure in the future.